The think tank Institute for Fiscal Studies (IFS) claims Britons could be in line for another massive tax hike.

The IFS claims chancellor George Osborne may consider pushing VAT to 25% from its current 20% rate in an attempt to part-plug the UK's deficit. But such a move would be devastating for consumers.

More on Tax

Know your rights

Need to know: Savings


Hike?

"The Chancellor may have to abandon one of his fiscal targets – that debt should be falling in 2015–16," says the IFS. "He may also need to announce yet more spending cuts or tax increases for the next parliament in order to continue to meet his other fiscal target."

To meet current targets though would mean plugging a £23bn black hole - equivalent to a VAT rise of 5% to 25%. Richard Dodd from the British Retail Consortium which represents shop owners told AOL Money he would not support a VAT increase.

"We're not in favour of VAT taxes. We very much reluctantly accepted the last rise to 20% as part of the deficit reduction move. Clearly consumers are under huge pressure and that's reflected in the performance of retailers. A tax increase would just add to those difficulties."

Poorest hit

The emphasis of deficit reduction should be on spending cuts rather than further tax rises Dodd adds. For hard-pressed consumers however, a VAT hike would be extraordinarily tough. VAT is the only tax everyone pays, from the unemployed to pensioners.

It also hits just about everything, from cinema tickets to the price of your newspaper. From the petrol or diesel you stick in your car to train fares. Companies who can't afford to absorb the increase simply pass it on to customers.

Third rise?

VAT has already risen twice recently, from 15% to 17.5% in January 2010, and again from 17.5% to 20% in January 2011. Meanwhile a campaign to boycott big names like Amazon and Starbucks - both accused of tax avoidance - commences this week.

In terms of the rest of Europe, Sweden, Iceland and Norway have VAT rates of 25% while Hungary boasts the highest at 27%. Liechtenstein and Switzerland have the lowest, both at 8%.

George Osborne will reveal his economic plans in his Autumn Statement, next Wednesday.

Tax tricks to improve your wealth

  • 1. Uniform tax
    <p> If you wear a uniform of any kind to work and have to wash, repair or replace it yourself, you may be able to reclaim tax paid over the last four years. For some people, this could mean a windfall worth hundreds of pounds</p>
    1. Uniform tax
  • 2. Savings tax
    <p> The interest you receive on savings accounts (with the exception of cash Isas) is automatically taxed at a rate of 20%.</p> <div> </div> <div> Higher-rate taxpayers therefore tend to owe money on the interest they are paid throughout the year. If, however, you are on a low income or not earning at all, you should be able to claim all or some of the tax deducted back</div>
    2. Savings tax
  • 3. Vehicle tax
    <p> You can apply for a refund of vehicle tax if you are the current registered keeper or were the last registered keeper of your vehicle that no longer needs a tax disc</p>
    3. Vehicle tax
  • 4. Pension tax
    <p> If you pay tax on a company, personal or State Pension through PAYE (the system employers use to deduct tax from your wages), you may well end up overpaying</p>
    4. Pension tax
  • 5. National Insurance contributions
    <p> There is a limit to the amount you need to pay in NI, whether or not you work for an employer.</p> <p> Instances in which you may find that you have overpaid include if you work two or more jobs and earn more than &pound;817 a week and if you move from self-employment to employment, but continue to pay Class 2 National Insurance contributions</p>
    5. National Insurance contributions


More stories